Presto Change-O

JAMES F. PELTZ

The Internet, airlines and health care were hot stock sectors during the first quarter, and real estate, oil services and computer disk drives were not. But don't count on that scenario extending through the second quarter, because the list of winners and losers is already being shuffled.

Take the oil services and airline sectors, for instance. Amid a steady slide in global oil prices, oil services stocks took a dive while airline shares took flight in the quarter.

Until 10 days ago, that is, when several major oil-producing nations announced production cuts that triggered a sharp rebound in prices of crude. That sparked a fierce rally in oil services shares and a drubbing of the airlines.

Result: Although the Philadelphia Stock Exchange's index of 12 airline shares still was up nearly 22% year-to-date as of Friday, it had been up almost 30% at March 16.

Meanwhile, real estate investment trusts, or REITs, which lagged badly through most of the first quarter, have started moving up lately as bargain hunters have resumed buying the issues.

Overall, the U.S. stock market was up 12.9% for the quarter through Friday, as measured by the blue-chip Standard & Poor's 500 index.

A healthy pace of consumer spending helped push many S&P; stock groups higher, including retailers, auto makers and home builders.

Among the standout performers not well-represented in the S&P; index were online stocks. Investors caught Internet fever again and bid related shares into the stratosphere relative to the companies' earnings--for the few companies that even have earnings yet.

Shares of wireless communications companies also surged, as some investors bet on fast growth prospects for the industry. CoreComm Inc. (COMM), for instance, has soared 67%.

In the health-care sector, health maintenance organization stocks rebounded after a fourth-quarter plunge related to depressed profit margins. Major drug stocks also were hot, on expectations for continued strong earnings growth: Warner-Lambert Co. is up 34% year to date.

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What about the second quarter? For starters, there's widespread agreement about one thing: The economic backdrop for the market overall could hardly be better, which is a key reason why stocks keep reaching record highs.

"The current U.S. economic environment is the best ever--steady growth without inflation," declared Goldman Sachs & Co. economists William Dudley and Edward McKelvey in a recent report. With the economy's expansion 7 years old in March, "there still is no recession in sight."

Perhaps. But that doesn't mean the economy won't at least slow down at some point. And when it does, what then?

The prospect is already on the mind of entertainment industry analyst Jill Krutick of Salomon Smith Barney. "As the economy heads into the late stages of its expansion, consumer spending could become pressured," she said.

In the entertainment field she advises sticking with the big diversified players that are less sensitive to an economic pullback. Her top picks: Walt Disney Co. (DIS), Time Warner Inc. (TWX) and Mattel Inc. (MAT).

Computer services stocks also get good reviews because, even if the economy slows a bit, demand for electronic data processing and related services is expected to sustain good growth.

Wireless communications stocks are one of the favorite groups of Standard & Poor's analysts, whose stock sector ratings are based on both stock price momentum and the companies' business fundamentals.

Although some investors favor price momentum alone as a good stock-picking system--the idea that what is hot often stays hot for a while--that can be dangerous.

For instance, shares of the Big 3 auto makers--General Motors Corp. (GM), Ford Motor Co. (F) and Chrysler Corp. (C)--easily outpaced the S&P; 500 in the first quarter. But now few analysts are recommending them, because of a glut of new cars on dealers' lots. So the stocks' momentum might not be enough to warrant buying them now.

Besides the wireless sector, S&P;'s analysts are bullish on several areas of the computer industry, including hardware, networking, semiconductors and data-processing services. They also give high ratings to drugstore chains, major banks, consumer finance companies, drug makers and air freight firms, among others.

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Sam Stovall, S&P;'s sector strategist, said his team likes technology stocks because many of them have been sold off recently, to the point where they're "buys" for investors looking out over the next year or so.

"If you ask our analysts, yes--in the next three to six months they continue to see a tough earnings environment" for many tech stocks, he said. "But they can't say the stocks are going to under-perform 12 to 18 months from now. They think they're going to do well."

In the semiconductor-manufacturing equipment sector, S&P;'s strongest recommendations go to KLA-Tencor Corp. (KLAC) and Applied Materials Inc. (AMAT). In the hardware arena, Dell Computer Corp. (DELL) is S&P;'s top pick even though the personal computer maker has nearly quadrupled in price over the last year.

Similarly, Salomon Smith Barney analyst Neil Herman likes software kingpin Microsoft Corp. (MSFT). Yes, Microsoft has surged 36% so far this year (giving it a market capitalization of $214 billion) and it trades for a hefty 52 times its expected per-share earnings for its fiscal year ending June 30--versus the S&P; 500's price-to-earnings multiple of 24 based on 1998 forecasts. But although others see Microsoft's growth slowing in tandem with a slowdown in personal computer sales, Herman said he expects Microsoft "will have long-term revenue growth of 25% [annually], as compared to the S&P; 500's 7%"--and that's a key reason he's got a "buy" rating on the stock.

Elsewhere, some oil-refining and marketing stocks are on S&P;'s list. Although oil prices have jumped recently, they are still down sharply from last fall, and thus consumer demand for gasoline remains strong, Stovall said. In the marketing sector, S&P; likes Tosco Corp. (TOS), which owns the Union 76 brand, and Ultramar Diamond Shamrock Corp. (UDS).

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S&P; and Morgan Stanley Dean Witter analyst Debra Levin both recommend some drugstore stocks. The stocks are considered ideal "defensive" issues if the economy should falter, and with a spree of mergers, the industry is consolidating into larger, more prosperous players, they said.

CVS Corp. (CVS), which operates east of California, is among their top picks. Levin also has a "strong buy" on Rite Aid Corp. (RAD), which owns the Thrifty Payless chain.

Some analysts also are bullish on selected air freight companies, which are benefiting from strong worldwide demand.

These are the stock groups within the Standard & Poor's 500 index that performed the best, and worst, in the first quarter, through Friday. Figures are price changes only (not including dividends). The S&P; index was up 12.9% in the period.